Weekly Economics Webinar by Deepal Basak
November 3 @ 6:30 pm - 7:40 pm
- This event has passed.
Title: Panics and Early Warnings [link to paper]
Speaker: Deepal Basak, Assistant Professor, Indiana University- Kelley School of Business
Abstract: We show how early warning about an impending regime change eliminates panic. Agents anticipate a future shock and decide when to attack. Waiting is costly, especially when others attack and cause a regime change while one waits. This may create panic. We model early warning as a dynamic disclosure policy and establish its optimality in a reasonably general setup. Under this policy, the unique rationalizable strategy is to ignore private information, wait for the warning, and then follow it. We discuss the robustness and limitations of this policy by relating it to forward-looking bank stress tests and debt sustainability analysis.